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Alex Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of
Alex Company produces a single product. The cost of producing and selling a single
unit of this product at the company's normal activity level of 70,000 units per month is as
follows:
The normal selling price of the product is $56.70 per unit. An order has been received
from an overseas customer for 2,000 units to be delivered this month at a special
discounted price. This order would have no effect on the company's normal sales and
would not change the total amount of the company's fixed costs. The variable selling and
administrative expense would be $0.70 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Instructions
a. Suppose there is enough idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $51.20 per unit. Should
Alex accept the offer?
b. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 700
units for regular customers. Should Alex accept the offer? variable cost :67200
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